Following the smart money can make you big money, study finds

Following the smart money can make you big money, study finds

It turns out that following the smartest of the "smart money" can improve your investing decisions, according to a recent study. And that may give you a good reason to buy the shares of certain apparel companies today.

A new study by Erin Gibbs, equity chief investment officer at Standard & Poor's Investment Advisory Services, begins by taking a look at the type of institutional investors out there, and how the stocks they buy performed. (A pdf of the study can be found by clicking here.)

Institutions have gained an overall larger stake in stocks over the past decade. About 82 percent of all S&P 500 shares are now owned by institutions, up from 73 percent a decade ago. (However, note that shares owned by ETFs are included in this percentage.)

Out of the 11 types of institutions Gibbs analyzed – including private equity firms, charities, pension plans, insurance companies, and sovereign wealth funds – one type of investor stood above the others.

(Read: Are you rich and sophisticated enough for private funds?)

Looking only at hedge funds with non-activist-sized stakes, Gibbs notes that "Hedge Fund Managers (<5% Stake) ownership was the only group with a distinct positive correlation of ownership to returns…. Stocks with higher levels of Hedge Fund Manager ownership displayed higher returns, and stocks with lower levels ownership displayed lower returns."

Gibbs theorizes that hedge fund favorites perform better because hedge fund managers have better resources and are positively motivated by their fee structures.

So which stocks have high hedge fund ownership and are worth a look right now? Gibbs identifies five: Gap, Coca-Cola Enterprises, Michael Kors, Fossil, and Yahoo. (CNBC is partners with Yahoo in the production of "Talking Numbers.")

Of these five stocks, Gibbs finds one particularly interesting.

"I really like Fossil," she said. "We've had this in our portfolio purely for fundamental reasons, but it's also been followed very highly by hedge funds. A year ago, it had about 10 percent [of shares] owned by hedge funds. It's now up to 18 percent. It has one of the highest ownerships by hedge funds out of the S&P 500."

As of the June 30 filing date, 41 hedge funds have bought into Fossil. But over the course of the past 12 months, their bet on the fashion accessories company has not paid off. Fossil shares have dropped 14 percent in the last year.

Nonetheless, Gibbs sees growth ahead for several reasons. She cites Fossil's deals with high-fashion designers like Tory Burch and Michael Kors, its wholesale business in Europe and Asia, and its return to smartwatch manufacturing as catalysts for further growth.

"And on top of it, it's trading at 13 times forward earnings, but we're expecting 16 percent earnings growth," Gibbs added. "This really looks like a strong value as [well] as a great potential growth story."

(Read: Most Americans clueless about market performance)

However, the short-term technicals may not agree with Gibbs and the hedge funds, according to Richard Ross, global technical strategist at Auerbach Grayson.

"This thing is just a straight line lower," said Ross about Fossil's short-term chart. "Clearly, this is just a bad stock chart."

Yet Ross sees some potential for the stock based on its long-term chart.

"You're sitting on a critical area of support at that 200-week moving average, which has held now for five years," said Ross, a "Talking Numbers" contributor. "We have resistance up around $135, where the stock has failed not once, not twice, but three times. But we're 30 percent down from that key area of resistance, sitting on an important area of support."

Investors who like the fundamentals story may find the current price to be a good entry point, he said. "This is a nice place to be a buyer if you like the story."

To see the full discussion on Fossil, with Gibbs on the fundamentals and Ross on the technicals, watch the above video.

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